Annual examination

Corporation law - Annual examination

Corporate Secretarial Practice in China

Does China have any company secretarial requirement in place? 
Yes, it does but in Chinese contexts. Both PRC Companies and foreign investment enterprises (FIE) have to comply with the legal requirements for incorporation, continued existence and operating the business in accordance with the PRC Company Law, the JV law, and the law for wholly foreign owned enterprises (WFOE).

What is joint annual examination? 
According to the "Notice of the Implementation Plan for the Joint Annual Examination on Foreign Investment Enterprises" promulgated by the Ministry of Foreign Trade and Economic Cooperation on 10th December 1998, the annual examination is conducted across the board to ensure that all the FIE should carry out the business in compliance with the legal requirements. The legal representative shall submit to the governing administrative body a signed "Joint Annual Examination Report" and other prescribed financial information. All FIE's are required to submit information to the administrative body including the annual examination report, the financial statements and other materials, all signed by the legal representative.

What if an FIE does not submit the information for annual examination?
First, the FIE cannot lawfully carry on business without submitting the required information. Second, the governing State Administration of Industry and Commerce can impose on the FIE a fine not exceeding RMB10,000. If the FIE does not rectify the non-compliance, the SAIC can revoke the business license in accordance with the law.

When does the annual examination on FIE take place?
It takes place once in a year and must be completed before 30th June each year.

Who conducts the annual examination? 
Seven Chinese administrative bodies will conduct the annual examination including the State Administration of Industry and Commerce, National Tax Bureau, Local Tax Bureau, the Customs, State Administration of Foreign Exchange, Finance Bureau, Local office of Ministry of Commerce.

What areas will the governing department of the State Administration of Industry and Commerce cover in the annual examination?
The main areas subject to annual examination include the following:

1. Whether the corporate name in use is consistent with the registered name;
2. Whether the principle place of business is same as the approved registered office;
3. Whether the information of the legal representative has been changed following the pass of a board resolution;
4. Whether the paid up capital is the same as the registered capital;
5. Whether the FIE has received the capital by installments as per JV contract or the Articles of Association;
6. Whether there is unlawful withdrawal of capital from the FIE;
7. Whether there is a change in the economic nature of the FIE and any amendment made accordingly;
8. Whether the FIE is engaged in activities as per approved business scope;
9. Whether business license or the period of operation has expired;
10. Whether there is any change of investors for the FIE;
11. Whether there is any forgery, alternation, lease, borrowing of the business license;
12. Whether the FIE has not commenced business for 6 months since the date of incorporation, or has suspended business for 6 months during any period.

Under what circumstances will the FIE fail to pass the annual examination?
Failure in the annual examination refers to the cases of serious breach of the law, absence of business address, the failure by the investors to contribute capital as per approved time schedule, and being dormant either for 6 months since the incorporation date or for 12 months in any other period.

What if the non-compliance found in annual examination is not rectified within the period prescribed by the local administration of industry and commerce (LAIC)?
There will be administrative punishment if the deficiency is not rectified on time. In serious cases, the approval authority shall revoke the approval certificate, and the governing LAIC shall revoke the business license.